Oil prices drop below $88 to 7-month low

Thursday, May 31, 2012 - 8:45am

The price of oil dropped below $88 a barrel Wednesday, hitting a seven-month low, as fiscal worries in Europe sparked a broad sell-off across markets.

In New York, oil prices finished at $87.49 a barrel, down $2.94, or 3.2%, from Tuesday. It was the lowest closing price for crude since Oct. 21.

Spain was the main culprit Wednesday, with the European Central Bank saying that even if it had been consulted about Bankia's recapitalization plan, the ECB and eurozone central banks could not assist. Bankia, Spain's fourth-largest bank, requested €19 billion in aid last Friday.

The larger fear is that economic troubles in Spain as well as Greece, Portugal and Italy will spark a recession in Europe and possibly worldwide, thus crimping the demand for oil.

"Fears of contagion in Europe has sent the euro plundering further closer to a two-year low, which is acting as a jackhammer on crude prices," Matt Smith, a commodity analyst at Summit Energy Services, wrote in a research note Wednesday.

Oil prices have fallen from a recent high of nearly $110 a barrel in March to their current levels, first on an improvement in relations with Iran and then over the deteriorating situation in Europe.

As a result, gasoline prices peaked early in the United States, hitting $3.94 a gallon in April and then declining to a current price of nearly $3.63 a gallon, according to AAA.

That's provided some relief to American motorists, although the extra dollars saved at the pump may be cold comfort if the root cause of the price decline sparks another recession in the United States.

While oil futures traded in New York have fallen sharply, the decline in gasoline prices isn't necessarily an exact mirror.

About 70% of the gasoline in the United States is made with oil that is not pegged to New York prices. Most of these global crudes have fallen in price as well, although not necessarily as fast or as steep as prices in New York.

It also usually takes a few weeks for gas prices at the pump to react to what oil futures are doing on the commodity exchanges.
 

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